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business
valuation measuring and managing
Valuation Measuring And Managing The Value Of Companies University Edition 6th Edition Mckinsey & Company Inc. ,Tim Koller ,Marc Goedhart ,David Wessels - Solutions
1. What is the purpose of investor communications? What do managers often believe the purpose is?
8. Comment on the following statement: “Since coupon rates on convertible debt are low relative to straight debt, convertible debt is a cheap source of financing.”
7. Discuss the importance of the “pecking order” theory for managing the capital structure of a company, in terms of both short-term, tactical financing decisions and long-term, strategic decisions.
6. Start-up companies typically have little or no debt. Discuss if and how this fits with value maximization, given the cost-benefit trade-offs between different levels of debt and tax savings, overinvestment, business disruption, and investor conflicts.
5. Describe the process a manager should employ to establish an effective capital structure and payout policies.
4. Explain why companies with the same credit rating can have very different coverage ratios.
3. The degree of company financial risk ismeasured and reported by independent rating agencies such as Standard & Poor’s and Moody’s. What factors do these rating agencies evaluate when determining a company’s financial risk classification? In what range of financial risk classification do we
2. Some companies carry essentially no long-term debt and only a minimal amount of short-term debt in their capital structure. Often these firms are in the technology and biotechnology sectors. Provide an explanation for why well-managed and profitable companies in these sectors appear to
1. Define optimal capital structure. What is the relationship between optimal capital structure, corporate value, and cost of capital? How does the concept of effective capital structure differ from optimal capital structure?
8. An electronics conglomerate intends to divest its high-growth energy division, which develops and manufactures solar panels, windmills, and other“green energy” products. The division has an estimated value of $250 million, around 5 percent of the total value of the conglomerate. What do you
7. An oil company wants to divest its low-growth chemicals division, which has an estimated stand-alone value of around $5 billion and represents around 40 percent of the entire oil company’s value. What do you think could be the most promising transaction approaches and why?
6. Identify and describe two private-transaction approaches to corporate divestiture and two public-transaction approaches. When are private transactions likely to create more value than public transactions?
5. An executive is reluctant to sell a high-performing business unit, arguing that the sale would dilute the company’s ROIC to a level below the WACC and make the company value-destroying. Discuss.
4. Acompany intends to sell one of its larger business units to a strategic buyer.The company’s controller is concerned because the salewould result in overcapacity of 25 percent in the company’s information technology (IT) center.He proposes that the company be compensated for these stranded
3. Identify and give examples of the five factors that complicate a manager’s decision to divest a business unit.
2. Describe the key reasonswhy divesting a business can create value for shareholders, even when the business is still in the early stages of its life cycle.
1. Explain under what conditions a divestiture will lead to earnings per share(EPS) dilution or accretion if the proceeds fromthe divestiture are used (a) to repay debt and (b) to repurchase shares. How do your answers relate to the value created by a divestiture?
8. Do firms involved in acquisitions do a better job of realizing cost savings or revenue improvements following an acquisition? Why?
7. Why is it hard for acquirers simply to buy cheap?
6. Describe the circumstances under which the acquirer is better off paying in stock rather than cash. What are the implications for the acquirers’ shareholders of paying in stock?
5. Why do many value-destroying acquisitions increase earnings per share(EPS)?
4. What would it take for an acquisition to increase the acquirer’s value by 10 percent? Give your answer in terms of size of deal, value of improvements, and premium paid.
3. Describe the six acquisition archetypes that often create value for an acquiring firm in an acquisition. Based on situations with which you are familiar, rank these archetypal strategies from easiest to hardest to plan and execute.
2. What are the pros and cons of measuring the success or failure of an acquisition by immediate stock price reactions to its announcement?
1. How can an acquisition create value for the combined entity’s shareholders but not for the acquirer’s shareholders?
7. Construct three different value driver trees for a company, using different branches.
6. What is the goal of setting performance targets?What are some of the pitfalls inherent in the way companies sometimes set targets?
5. What are the two categories of long-term value drivers? Provide some examples of potential long-term value drivers for a company that you are familiar with.
4. What are the three categories of medium-term value drivers? Provide some examples of potential medium-term value drivers for a company that you are familiar with.
3. What are the three categories of short-term value drivers? Provide some examples of potential short-term operating metrics for a company that you are familiar with.
2. Compare and contrast the value driver approach to performance measurement with the balanced-scorecard approach.
1. Define a granular perspective for performance measurement. Why is this crucial for performance measurement at large companies?
8. What are the benefits to societywhen a business is owned by its best owner?
7. Should a company operate a diversified portfolio of businesses? What are the arguments for and against?
6. What are the steps involved in constructing a portfolio? Discuss potential hurdles in executing the analytic approach.
5. Explain how and why the best owner of a business might change over time.
4. Provide examples of how the best owner of a business has changed over time. Give reasons for these changes.
3. What are some impediments to matching the best potential owner to a business?
2. What are the potential sources of value that the best owner brings to a business?Give an example of each.
1. Explain why the value of a business may differ under different owners.
8. The forward-rate and spot-rate methods for discounting foreign-currency cash flows are equivalent if interest rate parity holds. Assume that interest rate parity does not hold for a specific currency because it is pegged to the dollar at a fixed exchange rate and capital flows are controlled by
7. Discuss the differences between the current, temporal, and inflationadjusted current methods for translating the financial statements of acquisitions or divisions located in moderately inflationary and hyperinflationary economic environments.
6. U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) are converging. Since this is the case, whywould amanager need to understand the historical differences between these standards?
5. What impact does the globalization of capital markets have on a manager’s judgment of the appropriate cost of capital to employ when estimating the value of a subsidiary headquartered in a foreign country?
4. Are there conditions under which you should consider using a local market risk premium and a local beta estimate for a valuation, rather than a global risk premium and beta? Explain.
3. Why do local market risk premiums differ across national stock markets?Do the differences mean that some markets are more attractive to invest in than others?
2. Many companies use economists’ forecasts of foreign-exchange rates to translate cash flow projections denominated in foreign currency. What are the possible drawbacks of using such forecasts?
1. Is the cost of risk-free financing the same or different in different countries?
8. In conditions of high inflation, nonmonetary assets tend to be stated on the balance sheet at values far below their replacement costs. Inventory accounting can further complicate historical analysis for companies in such an environment.Which accounting methodology would better represent the
7. Assume that inflation unexpectedly increases by 10 percent. Explain why a company’s ROIC then needs to increase bymore than 10 percent to preserve its shareholder value.
6. Describe the five-step approach to combining nominal and real forecasts.
5. Why should you construct both real and nominal corporate forecasts when doing a valuation in high-inflation conditions?
4. Explain how an increase in inflation affects a company’s depreciation tax shields and what would be the resulting impact on the company’s value.
3. Describe the impact of high inflation on the financial statements of a company.What unique challenges does inflation present for analysis of historical performance?
2. Which company’s ROIC would you expect to go up more in times of inflation:a company with long-lived assets or one with short-lived assets, everything else being equal? Why?
1. Why does high inflation typically destroy value for companies?
6. Compute the annual free cash flow for ResearchCo with and without the capitalization of R&D.Howdo the two sets of free cash flows differ? Assume no depreciation of physical assets.
5. Use the R&D capitalization table developed in Question 4 to modify NOPLAT and invested capital from Question 3. What is the ROIC on yearend capital by year? How does this compare with the ROIC computed in Question 3?
4. Your colleague argues that R&D for ResearchCo should be capitalized and amortized. If R&D is capitalized,whatwill be the starting R&Dasset, investment in R&D, amortization of R&D, and ending R&D asset by year in the five-year forecast? Use straight-line amortization over three years, with the
3. ResearchCo is a medical devices company, producing equipment for diagnosing and treating heart disease. The company currently generates $100 million in revenues and is expected to grow 10 percent per year. ResearchCo maintains cost of sales at 50 percent of revenue, maintains research and
2. How much difference do we observe in CFROI versus ROIC estimates for firms?
1. When is cash flow return on investment (CFROI) more appropriate to use than ROIC?When is CFROI less appropriate to use than ROIC?
6. If there is no line item for prepaid pension assets or unfunded pension liabilities on a firm’s balance sheet, does this mean the firm’s pension plan is fully funded? Explain.
5. AutoCo, a large automobile company, reports operating income of $15.0 billion,$15.5 billion, and $16.0 billion over the next three years. Exhibit 20.10 displays a breakout of its pension expense from the footnotes of its annual report. Use this breakout to eliminate nonoperating income related
4. Many companies securitized their accounts receivable before the financial crisis of 2008. Why did this occur? After the financial crisis, this practice largely stopped. Why?
3. Many financial analysts estimate the value of operating leases by discounting rental payments provided in the annual report at the cost of debt. Is this method likely to overestimate or underestimate the value of leased assets?Why?
2. Casher Industries expects to earn $25 million in operating profit next year.The company pays an operating tax rate of 30 percent. Using the lease data provided in Question 1, what is the after-tax operating profit adjusted for capitalized operating leases?
1. Casher Industries leases a significant portion of its assets, expecting $25 million in rental expense next year. Casher Industries can borrow at 7 percent, and the average life of leased assets is seven years. Estimate the value of leased assets. If you misestimate the average life to be 10
5. What are some of the more common nonoperating items and one-time charges that should be excluded from operating expenses?
4. Companies in highly competitive industries often see a number of consecutive restructuring charges. In these cases, should restructuring be treated as operating or nonoperating? From a valuation perspective, what are the important issues that should be considered?
3. In year 0, SmoothCo has $50 million in cash and $50 million in inventory, financed by $100 million in equity. In year 1, the company records $100 million in revenue, $80 million in operating costs, and $10 million in litigation provisions for a case yet to be resolved. Based on the preceding
2. ValueCo generates $10 million in after-tax operating profit on $100 million in operating assets. The company has $20 million in accounts payable, $15 million in product warranty reserves, $5 million in severance reserves, $30 million in long-term debt, and $30 million in equity. What is
1. What are the three steps to assess the impact of nonoperating expenses and one-time charges on cash flow projections?
6. One of the most common deferred-tax liabilities occurs because of accelerated depreciation. When is the difference between reported taxes and cash taxes likely to be greatest? When will it be smallest? Can it reverse? That is, can cash taxes be higher than reported taxes?
5. ToyCo has working capital of $400 million, fixed assets equal to $800 million, and debt equal to $600 million. Use these data and the reorganized deferred taxes in Question 4 to create invested capital and total funds invested for year 3. Use equity as the plug to get total funds invested to
4. Exhibit 18.11 presents deferred-tax assets and liabilities for ToyCo. Using Exhibit 18.8 as a guide, reorganize the deferred-tax table into two categories:net operating deferred-tax assets (net of operating deferred-tax liabilities), and net nonoperating deferred-tax assets (net of nonoperating
3. When a company incorporated in a country with a high tax rate does business in countrieswith lower tax rates, it will report an effective tax rate below its statutory rate. Is the difference sustainable into the future? What occurs if the company decides to repatriate earnings? How should
2. Exhibit 18.6 presents two approaches for estimating operating taxes. Use both methods to determine the operating taxes for ToyCo in year 3. What are ToyCo’s statutory rate, effective tax rate, and operating tax rate (under both approaches)?
1. Exhibit 18.10 presents the tax reconciliation table for ToyCo, a $5 billion designer and distributor of children’s toys. Convert the tax table from percentages to millions of dollars. Separate the converted tax table into three groups: taxes attributable to domestic income, other operating
8. Comment on the following statement: “Since many firms’ valuations by a sum-of-the-parts multiples methodology are greater than the current market valuation of these firms, a breakup of these firms would add value for shareholders.”
7. What are two best practices for testing the sum-of-the-parts valuation based on multiples of peers? Why are they considered best practices?
6. In Question 5, you computed ROE based on an equity calculation equal to the difference between finance receivables and debt related to those receivables.Why might this ROE measurement lead to a result that is too high?
5. To finance customer purchases, ATVCo, a manufacturer and seller of allterrain vehicles, recently started a customer financing unit. ATVCo’s income statement and balance sheet for the past year are provided in Exhibit 17.11.Separate ATVCo’s income statement and balance sheet into the two
4. Using the valuation-by-parts framework, how should one allocate corporate overhead costs to different divisions of a company? Provide an example of an allocation procedure.
3. As CFO, you are trying to allocate investment funds across your threedivision firm. You observe the revenues last year as $2.0 billion, $1.5 billion, and $1.5 billion, respectively, for Divisions A, B, and C. Using these figures, you assume that Divisions A, B, and C should have investment
2. You have estimated theNOPLAT for each of the divisions in a three-division firm at $40 million, $60 million, and $100 million, respectively, for Divisions A, B, and C. Using these figures, you assume that Divisions A, B, and C contribute 20, 30, and 50 percent, respectively, to overall firm
1. BreakfastCo is a food company with three product divisions: branded cereals, generic cereals, and healthy breakfast options. Given the information in Exhibit 17.10, calculate the present value of the firm’s operations. What insights does this analysis give you?EXHIBIT 17.10 BreakfastCo:
9. What are the limitations of using enterprise-value-to-revenues multiples?When are they useful?
8. LeverCo is financed entirely by equity. The company generates operating profit equal to $80 million. LeverCo currently trades at an equity value of$900 million. At a tax rate of 25 percent, what is the price-to-earnings multiple for LeverCo? New management decides to increase leverage through a
7. Competitors BlueBev and RedBev have the same long-term prospects concerning growth and ROICs. RedBev temporarily stumbles during a newproduct launch, and profits drop considerably as the company scrambles to fix the error. Which company is likely to have the higher enterprise-valueto-EBITA
6. You are valuingmultiple steady-state companies in the same industry. CompanyAis projected to earn $160 million in EBITAnext year, growat 2 percent per year, and generate ROICs equal to 15 percent. Company C is projected to earn $160 million in EBITAnext year, grow at 5 percent per year, and
5. You are valuingmultiple steady-state companies in the same industry. CompanyAis projected to earn $160 million in EBITAnext year, growat 2 percent per year, and generate ROICs equal to 15 percent. Company B is projected to earn $160 million in EBITAnext year, grow at 6 percent per year, and
4. Exhibit 16.12 presents market and profit data for three companies that operate in the same industry. If Company 3 has nonconsolidated subsidiaries valued at $50 million, what are the company’s enterprise-value-to-EBITDA and enterprise-value-to-EBITA multiples? How might ignoring the impact of
3. Exhibit 16.12 presents market and profit data for three companies that operate in the same industry. Using the data, compute ratios of enterprise value to EBITDA and enterprise value to EBITA for Companies 1 and 2. Is the net difference between Company 1 and Company 2 the same for both ratios?
2. What is a forward-looking multiple? Why should one use forward-looking multiples as opposed to backward-looking multiples when valuing companies?
1. DiversCo, a large U.S. company, operates in two areas: energy and retail clothing. You observe an analyst report that valuesDiversCo using multiples analysis based on a peer group of other large U.S. diversified companies. Do you think that this is an appropriate approach?Why or why not?
5. Refer to Exhibit 15.6, Part B from Consumer Products Co’s annual report.Here you will find financials by segment. What are the operating margins by segment? Based on operating margin by segment, can Consumer Products Co be valued as a whole, or should individual segments be valued separately?
4. Consumer Products Co reports growth by segment in the “Management’s Discussion and Analysis” section of its annual report (shown here in Exhibit 15.6, Part A) for a given year. For this year, does each segment have the same organic growth characteristics? As an approximation, set organic
3. A colleague recommends a shortcut to value the company in Question 2.Rather than compute each scenario separately, the colleague recommends averaging each input, such that growth equals 4 percent and ROIC equals 12 percent.Will this lead to the same enterprise value as you found in Question 2?
2. You decide to value a steady-state company using probability-weighted scenario analysis. In scenario 1, NOPLAT is expected to grow at 6 percent, and ROIC equals 16 percent. In scenario 2, NOPLAT is expected to growat 2 percent, and ROIC equals 8 percent. Next year’s NOPLAT is expected to
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